For mutual-fund investors, now may be the time to grit one's teeth and go global.
One big reason: valuations.
US valuation levels have "dropped to last place," says Bernard Horn Jr., president of Boston-based Polaris Capital Management and manager of the Polaris Global Value Fund, a world fund that includes both US and foreign companies.
Conversely, valuation levels look promising in many foreign countries. That may heighten investor interest in international funds.
Doing so will take courage. Such funds have not exactly blazed a trail of glory lately. Whether the funds are called "world" or "global" (investing in overseas-based and US firms), or "foreign" (strictly non-US holdings), results have been essentially negative - just as most US-based equity funds have been.
Year-to-date, through November, foreign-equity funds are down some 15 percent, according to information firm Morningstar Inc., in Chicago. World funds are down 10 percent.
Moreover, the global economy hardly looks promising at this juncture, with the US, Europe, Japan, and much of Asia in recession.
But on one level this only adds to the case for considering funds invested abroad: Interest rates have tumbled in most of the world, which has traditionally been good news for stocks, since competing investments - such as bonds, certificates of deposits, and money funds - lose much of their luster.
Also, stock markets tend to move ahead of underlying economic factors. So stock prices start back up well before there is a formal turnaround in the economy, as may already be occurring in the US, many experts say.
And owning a solid international holding represents a key step toward all-important diversification, many analysts agree. To ignore such diversification is to risk missing opportunities.
"Some of the best companies in the world are outside the US," notes Gregg Wolper, who tracks foreign funds for Morningstar.
Mr. Wolper stresses that investors should think long-term, and not try to time the market. Still, many experts say a particular economic window is now open for buying into overseas issues.
"The world economy should be up 1-1/2 percent or so in 2002," says Nariman Behravesh, chief economist for DRI-WEFA, an international consulting and forecasting firm in Lexington, Mass.
The main rebound will come in the second half of the year, led by the US economy, he says. There will be a lag of about six months for Europe and Asia excluding Japan, but recovery should be well under way for those regions by the first half of 2003, he says.
Within Europe, economies on the edges of the continent should post the strongest growth, including Spain, Ireland, Finland, and, to a lesser degree, Greece, Mr. Behravesh says. In Asia, Japan represents a special case, since it has severe structural problems, dampening growth, he says.
Behravesh believes that some caution is in order. Another terrorist incident like that of Sept. 11 could derail economic recovery, he says. Recovery could also be threatened if the current war in Afghanistan were to spread to other parts of the Middle East, including Iraq, he says.
Mr. Horn, for his part, likes solid, globally based value companies. Asia, excluding Japan, holds many promising value firms, he says. He even sees some signs of renewal within Japanese equity markets. Still, his global fund has a 55 percent US position, with the rest from around the world.
Other analysts say that since most US investors are already well-exposed to domestic firms, such funds can be redundant.
Gabriel Presler, who tracks global and world funds for Morningstar, argues that for most investors, it is better to go with a broad-based foreign fund that excludes US companies.
In most broad-based foreign funds, says Morningstar's Wolper, European firms make up at least 60 percent or so of the portfolio. So it is important, he says, to find funds in which managers cast a wide net around the world for first-rate companies, whatever their investment orientation.